PACCAR Inc.

Good morning, and welcome to PACCAR's third quarter 2020 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded, and if anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead.

Good morning. We would like to welcome those listening by phone and those on the webcast. My name is Ken Hastings, PACR's Director of Investor Relations. And joining me this morning are Preston Feith, Chief Executive Officer, Harry Skippers, President and Chief Financial Officer, and Michael Barkley, Senior Vice President and Controller. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties, including general economic and competitive conditions that may affect expected results. For additional information, please see our SEC filings and the investor relations page of PACCAR.com. I would now like to introduce Preston Fite.

Hey, good morning. Barry Skippers, Michael Barkley, and I will update you on our excellent third quarter results and business highlights. First and foremost, I appreciate our outstanding PACCAR employees. They have continued to focus on staying safe and healthy while delivering the highest quality trucks, advanced power trains, and transportation solutions to our customers. PACCAR achieved strong revenues and net income in the third quarter. PACCAR's quarterly truck deliveries doubled to 36,000 vehicles compared to the second quarter of this year. PACCAR's quarterly sales and financial services revenues were $4.9 billion. and third quarter net income was $386 million. PACCAR parts achieved quarterly revenues of over $1 billion and pre-tax profits of $210 million, exceeding the strong third quarter of last year. Truck, parts, and other gross margins increased to 12.8%. PACCAR Financial achieved robust new financing business and pre-tax income of $56 million. U.S. and Canada Class A truck industry orders through September were 18% higher than the same period last year. PACCAR expects fourth quarter deliveries to be 10% higher than the third quarter as build rates increase in all markets. The fourth quarter will have fewer build days in North America and more build days in Europe. Fourth quarter truck parts and other gross margins are estimated to be in a range of 12% to 13%. We have raised our 2020 market size estimates in North America, Europe, and South America. We estimate Class 8 industry retail sales in the US and Canada to be in a range of 190 to 210,000 trucks this year. Peterbilt and Kenworth have achieved 29.7% market share through September, compared to 29.2% for the same period last year. For 2021, The U.S. economy is expected to grow about 4%, and we estimate the U.S. and Canadian Class A truck market to be in the range of 210,000 to 250,000 vehicles. In Europe, truck industry registrations in the above 16-ton market are estimated to be in a range of 210,000 to 230,000 vehicles this year. DOF has achieved market share of 16.1% through September this year. European economies are projected to grow about 5% next year, and we expect truck registrations to increase to a range of 230,000 to 270,000 units. The South American above 16 ton market is projected to be in a range of 95,000 to 105,000 units next year. DOF Brazil introduced a new XF truck in the third quarter, which has been well received by our customers. In the Brazilian above 40-ton segment where DOF competes, DOF market share through September increased to a record 9.3%. PACCAR's zero emissions vehicle programs continue to move forward. We've begun accepting orders for our industry-leading battery electric trucks that will serve the medium duty, regional haul, and refuse markets in Europe and North America. Production of these trucks will begin next year. vehicle charging stations will be available through Packard Parts. We're pleased to share that Packard, Kenworth, Peterbilt, Packard Parts, and DynaCraft were each recognized as a top company for women to work for in transportation by the Women in Trucking Association. We were honored for our excellent working environment and company culture that supports gender diversity. Packard's committed to hiring and promoting the most talented people in the world and we know that the best people represent the diversity present in the global community. Harry Skipper will now provide an update on PACCAR parts, PACCAR financial services, and other business highlights. Thank you. Harry?

Thanks, Preston. PACCAR continues to provide excellent operating cash flow for reinvestment in future growth and distributions to stockholders. Last month, the PECA Board of Directors announced a regular quarterly dividend of 32 cents per share. PECA Parts achieved quarterly revenues of $1 billion and $20 million, and pre-tax profits of $210 million. PECA Parts benefited from the economic recovery, high truck utilization, a growing global distribution network, and investments in our state-of-the-art e-commerce platform. E-commerce is PECA Parts' fastest growing business. PECA Financial Services' third quarter revenues were $398 million, and Predax income was $56 million. These results reflect strong portfolio performance, low past use, and record used truck sales. Robust used truck sales led to a reduction in used truck inventory. Pekar Financial is increasing its used truck center capacity worldwide, which enhances margins. Pekar Financial recently opened used truck centers in Lyon, France, Denton, Texas, and in Prague, Czech Republic, and plans to open another facility in Madrid, Spain, next year. Pekar's truck resale values come on the premium over the competition. Research and development expenses are expected to be in a range of $270 to $218 million this year, and capital investments are projected to be in a range of $570 to $600 million. In 2021, we're planning for R&D expenses of $330 to $360 million, and capital investments of $575 to $625 million. Packer is investing for long-term growth in new truck models, low-emission diesel and zero-emissions powertrain technologies, advanced driver assistance systems, and connected services. And finally, our independent Kenworth, Peterbilt, and Dove dealers continue to provide outstanding support to our customers. Our dealers are well-capitalized and have invested $2.6 billion in their businesses in the last 10 years. making a significant contribution to PECR's success. Thank you. We'd be pleased to answer your questions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Our first question comes from the line of Nicole DeBlaise with Deutsche Bank. Your line is open.

Yeah, thanks. Good morning, guys, and good afternoon to you both peeps. I guess maybe starting with the outlook for 4Q, I know you guys said that you expect build rates to increase across all markets. Is there any way that you could kind of characterize the level of growth that you're seeing in North America versus Europe, given the element of build days?

Yeah, great comments, Nicole. You already captured part of the answer in talking about build days, but we have seen increases in build rates throughout the third quarter. and more than doubling from the second quarter. The fourth quarter will also see increases in build rates, daily build rates in all markets. And then from a total delivery standpoint, we'd expect to see a higher number of deliveries in Europe because of the build mix there where we have more build days in Europe compared to the third quarter where there's the holiday shutdown. But all markets are seeing increases in build rates with the strong order intake we've been seeing.

Got it. Okay, that makes sense. And then just one more on Europe. I mean, obviously, we're all seeing the headlines with respect to COVID cases ramping up. Just curious what you guys have seen most recently with respect to order activity from customers, whether that's been impacted by COVID.

Sure. Well, obviously, we read the same news you do, and we watch the increases in COVID cases, but our customers have really been providing strong order intake for the excellent DOF trucks that we make. We haven't seen any hesitation in orders in recent times as that has come up. And our factories are doing a great job of making sure that health and safety is the most important thing that we focus on each and every day so we're able to build trucks in the environment in a safe and effective way. And order intake remains strong.

Got it. Thanks. I'll pass it along.

All right. Great. Thanks. Have a good day.

Our next question comes from the line of Andy Casey with Wells Fargo Securities. Your line is now open.

Good day, everybody. Question on the battery electric trucks you're introducing next year. I'm wondering if you're accepting orders for those already. The reason I'm asking is the narrative on those type of trucks is that they probably are going to have lower future part sales opportunity than clean diesel equipped trucks. First, does that jive with your expectations? And then second, Can you help us understand how you would approach pricing given that, you know, potential lower future parts revenue stream? You know, should you expect to capture kind of a higher margin up front or anything you could do to help us would be appreciated?

Sure thing. Well, your first comment about whether we're accepting orders, we are accepting orders with Peterbilt, Kenworth, and Doff are taking orders for the trucks. We expect to be in production next year of the trucks. We are actually providing them to customers already and doing test work with our customers. We're working on battery technology as well as hydrogen fuel cell technology. And in fact, just from a fun thing to share, last week Kenworth and Peterbilt took a hydrogen fuel cell truck and a battery electric truck. Kenworth's was the hydrogen fuel cell. Peterbilt's was the battery electric. And they drove them up Pikes Peak all the way to the summit. So the programs are progressing along nicely. The team's having a lot of fun developing excellent products, and we're looking forward to that market developing. It is early days, and so, you know, from a standpoint of how many orders, it could be in the hundreds. When we look at your question of part sales and what we think looking forward, I think there's going to be plenty of parts that go along with electric vehicles for a while. And one way to think about it is the cost of a battery pack is pretty significant. It's a contributing factor to a cost of an electric vehicle. And somewhere in the lifetime, a battery pack could be replaced. They also have the same suspension components, the same steering components. And they will have wear items, just like every other truck does. So I think that the pricing of how we'll do that will be based on cost and good margins. And Harry?

Well, in addition to the trucks, we will also be selling chargers. And also the chargers will need replacement parts.

So the total of all of that, I think, is that I don't think it's going to be disruptive to our model. It could even be helpful to our model for the coming period of time.

Okay, that's very helpful. Thank you very much.

Our next question comes from the line of Stephen Volkman with Jefferies. Your line is now open.

Great. Hi. Good morning, everybody.

Good morning. Afternoon.

Yes, maybe just sort of sticking with that, but broadening it out a little bit. Sometimes I get questions around just how do you view kind of R&D spending for the next few years? And some people seem to think maybe others are spending more. I know your business model is a little bit more outsourced, a little bit more partner driven. But maybe you can just talk about how we should view your level of R&D spending over the next few years as we kind of make this transition.

Well, you know, we always make sure that we invest appropriately for the opportunities that we have. And I think our history has demonstrated a great set of investments that have been good for our customers, and we always think about it from a customer standpoint. And I can tell you what, I've never been more excited than I am right now about the kind of products we're bringing out over the coming year or two. And going forward, for the next five-year strategy we've laid out, we have a great set of products coming out. So... The spending may increase a little bit, as Harry showed or commented on. We could see 330 to 360 in R&D spending next year. But our real focus on making sure that our customers get the very best trucks, transportation solutions, and parts. And it's never been better than right now.

Okay. All right. Thanks for that. And then just a quick follow-up. I appreciate your initial views on 21. I'm just curious relative to kind of inventories. I know you guys aren't big on inventories, but Would you expect to produce more next year than whatever the retail sales turns out to be, or would you sort of produce in line with that, do you think?

If you start with where we're at now, there's two and a half months of industry inventory out there, and Packer, I can't repeat it, will have about 2.2 months. And so when I look at that and I think about what the order intake looks like, build rates intake, I think it will be roughly in line. It could be a little bit more production, but not too much.

Great. Thanks, Preston.

Have a great day.

You too.

Our next question comes from the line of Ross Gilardi with Bank of America. Your line is now open.

Hey, good morning, guys. Morning. Afternoon. Maybe we'll stay on the EV topic. If you look out five years, do you have an expectation that you can share of EVs as a percentage of – either Class 8 or Class 6-7 production?

Sure. What we think is the way this market's going to develop, Ross, is it's going to be, you know, hundreds kind of next year. And then we'll get to a point in 2024 and 2025 where there's some regulatory requirements for production. And by that time, we should see ourselves in the thousands, low thousands. And it'll obviously depend on what kind of regulatory environment develops throughout Europe or California. And... what we want to make sure we have is the products that are ready to go and the most reliable and capable products. And so that's the path we're on. So we'll be ready if there's ready for thousands or stays at hundreds. And if it wants to go to tens of thousands, we'll be prepared for that.

So low, low thousands in, by 2024, 25 on a 250,000 replacement market, you're, you're talking like, you know, one, 1% of the market by, by then. Okay. And, and how about, Class A versus 6, 7, because certainly battery up until now has been a bigger technical challenge, but of course you're working on hydrogen fuel cell as well. So what are your thoughts there?

So thinking is there, as you mentioned well, Ross, it'll be medium duty in urban environments where trucks return back to a fixed location, fixed operation is an easy place for adoption to begin. But if there are places like in Europe where cities might not allow a diesel truck in, then that will mean regional haul trucks could end up being battery electric. And then as fuel cells become viable and commercially relevant, then they could play a role also. So I think right now what we're doing is making sure that we look at a range of full capabilities and technology choices out there and integrating them in in an effective way for our customers.

Got it. And then can you talk a little bit about just how you see the shape of the cycle evolving next couple years with the explosion of of e-commerce not that e-commerce is a new thing but but clearly we're all we're all seeing you know the the numbers for um for e-commerce and um kind of the way i'm thinking of it if north america class a replacement is normally 225 to 250 000 um are we at a higher number now because of the environment we're in and then also on top of that is is there any motivation for the company to move down market into the light duty space to capitalize on more of the growth in things like delivery vans and last mile?

Well, I think that, you know, as e-commerce comes along, it's not going to affect the fact that people consume on an individual basis the same amount of goods. Maybe it's how those goods are delivered. But there'll still be manufacturing and distribution, and I don't think that'll fundamentally or structurally change in any way from a class six through eight market. I would share that we have some amazing products in that Class 6 market space right now with our Cabover products here in North America. It's also the market leader in the UK for that Cabover LF. And we have some really neat products we're developing to fill in and continue to develop the medium-duty space for ourselves in the coming years.

Thanks very much.

You bet.

Our next question comes from the line of Jamie Cook with Credit Smith. Your line is now open.

Hi, good morning. I guess two questions. My first question, as we think about 2021, can you talk about your confidence level in terms of market outgrowth, whether it be on the parts side, market share on truck, or the 11 and 13 liter engine, just how we should think about that as markets recover? And then my second question, can you comment, was there any sort of mix or pricing dynamics in the third quarter? what you saw on that front. Thank you.

So just to start with, if you think about share, we've got 29.7% of the market share in the U.S. and Canada right now, year-to-date, compared to 29.2. So we're seeing good share growth for ourselves. Our MX engines are doing a great job out there with the 11-liter and the 13-liter. Of course, it's 100% of our engine volume in Europe, and it's 41% in North America. So that's working really well for us, in addition. And then from a

From a pricing point of view, the pricing in the third quarter was more or less slightly down like half a percent or so, but pretty good performance in terms of pricing given the current market dynamics.

And that's compared to a very strong 2019? Absolutely, absolutely.

Okay, thank you. I appreciate it.

You bet. Have a good day.

Our next question comes from the line of Ann Dagen with J.P. Morgan. Your line is open.

Yeah, thank you. Just a few follow-up questions. In financial services on the interest expense line, that was higher than we had expected. Can you just talk about that line item and what was in there? Were there any anomalies or is that kind of the runway rate that we should look at going forward?

In the third quarter, Jamie, we saw the record number of used trucks and the costs of those used trucks appear in that line item. And used truck results were unfavorable compared to last year, but they were fairly similar to the second quarter. Overall, the finance company is doing really well. You saw low credit losses. We have low past dues of only 0.6% at the end of the third quarter. Good portfolio, A and B credits, customers continue to pay their bills. The finance company is doing really well.

But are you saying that if that was a higher expense than the last couple of quarters, that you're recording a loss on each sale of a used truck? And so more used truck sales means a higher loss or a higher expense?

Yes. Like in the second quarter, results on used trucks were unfavorable. It was nice to see that the used truck inventory came down during the third quarter. So that's going to be good going forward.

You know, we're starting to see that in some of the used truck areas where people are looking for great products, they're starting to see pricing increases. And Peterbilt, Ken worked off, they continue to provide a premium resale value in our used truck business compared to the competition.

Yes, but if everybody's used prices are down, it's kind of relative to this.

We get a premium on the used trucks, but we're not the only ones in the used truck market.

Exactly. And then can you just explain a little bit more, talk a little bit more about the e-commerce business in parts? Give us a little bit more color of what's going on there. You highlighted it in your open comments. I'd like to hear more. Thank you.

Sure thing, Anne. I mean, we've had e-commerce for a long time, but our Pack Our Parts team did a fantastic job of creating a real user-friendly, easy-to-use for customers and dealers e-commerce system that just makes ordering easier and but it also makes related parts easier, so that it's quite simple to go in and find if you buy a filter for something, it might also point you towards another component. So the team has done a great job of making a very easy user interface, and we've seen significant growth in the amount of e-commerce we're doing. It is the fastest growing part of our parts business as people transition there, so that's really nice. I'd also just give a shout out to the parts team for the way they're engaging with the dealers on auto except for dealer inventory stocking. So they're doing a fantastic job on that front too. And I think both those things plus the support of how the team is supporting our customers is leading to their growth.

And so the way for us to think about that business going forward is there's opportunity for A, more customers to use e-commerce and then B, a higher spend per customer. Are there two opportunities there? Is that the right way for us to think about it?

And I like the great wording, Anne. I agree with you. Yes.

Okay. That's it from me in the interest of time. Thank you.

Have a great day.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

Hi. Good morning. Good afternoon, everyone.

Hey, Jerry.

You know, we really jumped out. This quarter was your SG&A performance. You know, like you mentioned, production nearly doubled. Your SG&A was up just 7% sequentially. How should we think about the SG&A run rate from here? Any costs that we should think about as coming back in better times, or is this a situation where we're actually going to be able to run rate this level of SG&A going forward?

Well, I think that the team has done a fantastic job of cost control, as always. We look at everything we do and spend where it's necessary. So I think there will be some modest increases as we get into the fourth quarter. Just a for example, if you think about travel, getting anywhere internationally has been relatively limited. So when that opens up, or as travel reopens, that will become a possibility for SG&A increases.

Okay. And then in terms of your electric vehicle lineup, really impressive range of products that you folks have available for order, you're obviously skewing on the local range. One of your new competitors is laying out a 500-mile product at $180,000. Can you just talk about your decision not to lay out a product within that mileage range, and how feasible do you think that cost point is if we're talking about five years out for the industry as a whole? Can you weigh in?

Sure, happily. I do think, as I said earlier, that the urban areas will be the easiest places to make a cost-effective decision around battery electric vehicles. And I think in the battery electric space for the regional hall markets and the refuse markets, that's also an opportunity, again, where you're coming back to a charging station. When you get into the longer lengths of halls, especially a number like 500 miles, You're talking about needing a significant charging infrastructure. And you also have to realize that the weight of the batteries becomes significant to the total operating efficiency of the haul. So we think that it will evolve in a rational manner, and we'll participate in that. And that's why we look at both the battery electric and the hydrogen fuel cells, because battery electric will be rational for some of the routes we just described. And potentially, fuel cell will take off on some of the longer haul. But it also needs an infrastructure. So we just want to make sure that we're there with the right product for our customers. And as they want them, we'll have them.

And lastly, you know, the CARB regulations for 2024 look for, you know, pretty meaningful increases in warranties and big reductions in NOx. Can you talk about your plan for those standards and how much does the cost structure have to move higher? You know, some industry participants... are talking about the warranty cost being over $10,000, essentially, adding to the cost of a truck. Can you just talk about how you see it playing out and your plans for the standards?

Well, we've been through a lot of emission cycles as we've gone through the decades now. And as an industry, and certainly as PACCAR, we're always able to meet them. We intend to be able to meet them as well. We do expect that the warranty requirements change, and that's an accrual rate. So we'll make the right accrual rates for that, but we believe in our technical capabilities for both us and our partners in Cummins to develop great engines and powertrains that'll meet the diesel emissions requirements for the coming decade. And as we've talked a lot about already today, we'll have a complementary set of products in the electric vehicle space and hybrid space.

And is that $10,000 plus number increase in the cost of a vehicle? Is that... Can you just weigh in on that aspect, how material is the cost increase to that customer?

Jerry, I don't think that it would be appropriate at this point. It's pretty early days, and we have a lot of great people working on those things, and we'll figure out ways to manage that cost to the lowest level possible.

Okay. Thank you, Preston. I appreciate the discussion. Thanks, everyone.

You bet. Have a great day.

Our next question comes from the line of David Rasso with Evercore ISI. Your line is now open.

Hi, thank you for taking the question. So my question relates to a good afternoon. My question relates to just trying to think through the gross margin profile for 2021. In the third quarter and first quarter of this year, you delivered 36,000 and 38,000 trucks respectively. And you're anticipating 39 to 40,000 deliveries next quarter, the fourth quarter. And during the middle of last decade, when you were delivering similar volumes each quarter, gross margins were pretty comfortably between 14 and 15%. And this year in those quarters, including what you're forecasting for the fourth quarter, they're only between 12 and 13%. I would assume addressing costs and manufacturing volatility due to the pandemic, it could account for maybe all that 200 basis points to lower gross margins, even though parts is a bigger piece of the revenue today than five years ago. So that all said, I'm just trying to think about for 2021, just trying to think through likely quarterly delivery volumes, should we expect a return to the relationship of usual where volumes are and gross margins? Or is there something about incremental cost or sales mix for 21 that we really should consider moving off that traditional relationship of volume and gross margin?

Well, Two-part answer to your question, David. Thanks for the question. Good discussion. When you think about our market sizes right now that we're talking about, we're coming off of the second quarter, as you know well. It was pretty quiet. We're returning to some more increased rates. So if this year is 190 to 210, we think next year in the U.S.-Canada could be in that 210 to 250 range. It's still below replacement value, so it's still not a giant market. It's a healthy market. And I think there's a lot of uncertainty around what next year will bring in terms of the general economy and COVID and protocols we have in place from a labor control standpoint, making sure our employees are safe and cared for. So I think it's a little bit early to be kind of weighing in on what next year's full margins might likely be.

Should I take that, though? Because if volumes are similar to a prior period, I mean, the volumes are the same. is it a function of it's simply about price cost and obviously the more robust the market is the better you can do on price and it was also efficient for any mix I'm just trying to understand 200 basis points this year was not a normal year so I'm not saying the margin should be as high as you know five years ago with these volumes I'm just trying to think if we can move through this just kind of framework something to think about for 21 and it sounds like you're saying all volumes aren't created equal, and it's not necessarily due to mix, but it's more the robustness of the market where, you know, maybe you can get a little better price or not. Is that a fair generalization?

Yeah, I think that's a fair generalization, and I think the other way to think of it is, you know, as we look historically and even right now, PACCAR always delivers the best industries, highest operating margins, and we'll continue to focus on delivering that.

I appreciate it. One last quick question. Delivery lead times. Obviously, orders are ramping up a bit, but can you give us a sense of where delivery lead times today, say particularly at a Denton and Chillicothe versus this time last year? Is this a rough idea on, say, number of weeks?

Sure, happy to do that. You know, we're looking at filling in just the final slots in the fourth quarter. We're substantially full in both the U.S. and Europe. There are a few slots in that late November, December timeframe. They're moving quickly, and we're really kind of getting our attention focused into the first part of next year.

And how would you compare that versus this time last year?

Well, I think they're totally different markets. You know, last year at this point, we were coming off of a very strong market and coming into a more normalized market, I think. And now we're looking at the beginning of an acceleration in the market.

I appreciate it. Thanks for the time.

Enjoy the day.

Our next question comes from the line of Joel Tiss with BMO. Your line is now open.

Okay, thanks, guys. Most of them have been answered. I wondered if you think you're going to be, just in your model and the way things are sort of laid out, you think you're going to be close to break even by that 2025 in electric, or you think it's going to take a little longer than that?

You know, we like to make money in everything we do, Joel, and so I think that our angle is to do that. It's early days, but our focus is always to, you know, build great products, provide great services to our customers, and make money doing it. And that's our model for EV just as well as for anything else we do.

And are you seeing any sort of outsized market share opportunities with one of your bigger competitors being a little distracted or it's just sort of business as usual?

We think that we can just share with the customers how great our trucks are, especially the things we're developing that are coming out in the coming years. that that'll take care of market share for us. We just want to make sure we got them to understand how fantastic the performances of these products we're creating.

All right, at least I got you to laugh.

You did do that, Joe. Have a great day.

Our next question comes from the line of Stephen Fisher with UBS. Your line is now open.

Thanks. Good morning, guys. Just to... uh morning just want to follow up on david rasta's question but more in the near term rather than 2021 the margins in q4 sounds like on the 10 increase in deliveries but the flat margin uh can you just talk about what some of the puts and takes in the near term are uh in within that keeping the margin flat on higher volumes

Yeah, we think that that 12% to 13% is good margin performance for where we're sitting in the market sizes that we're dealing with. But just a couple of the puts and takes is in the fourth quarter, there are more build days in Europe compared to North America. And there's a mixed shift as trucks increase compared to parts. And so those are two factors that weigh into that fourth quarter margin. But we still believe that our focus is on providing the industry's best operating margins, and we expect to do so.

Okay, that's helpful. And then just curious, how much is timing within the order book shifting around right now and in what direction? I'm wondering to what extent you're seeing orders either getting accelerated or getting pushed out. I imagine there might be some different dynamics within some of the different end markets that you're serving, be it on highway or vocational construction, et cetera. I'm curious where at all. nets out if you're seeing people actually wanting trucks earlier or if you're trying to push them out a little, if people are pushing them out a little further?

What we see is nothing really related to push outs right now. And what we see is that the trucking economy is doing pretty well in most of its sectors. So the refrigerated carriers are doing well. The housing people in support of vocational markets are doing well. The consumer goods markets are doing well. And this is true for both Europe and North America. And people have been running their trucks at a below replacement value or replacement market size for a year. And so the opportunity is that they're ready for the excellent performing high fuel efficiency, high reliability trucks that we're building now. And so there's no real pushouts happening. It's people that are ordering to support their businesses, which are doing really well.

And any accelerations?

Yeah, well, there's been growth in orders as obvious over the last quarter or so, and it continues to be. appropriate to the market sizes that we're sitting in.

Okay. Thanks a lot.

All right. You bet.

Have a great afternoon. You too.

All right. Our next question comes from the line of Chad Dillard with Bernstein. Your line is now open.

Hi. Good afternoon, everyone.

Hey, good afternoon.

So can you talk a little bit more about your strategy of providing charging infrastructure for the battery electric vehicles? If you could touch on the scope. Just how big of an investment do you need to get to that low thousands that you're talking about in 2024? And I know that PACCAR is providing, but is the cost included in the actual price to the consumer, or is this more of an investment that PACCAR feels needs to be made to get that market to scale?

I think the way to think about charging is that you need a charger for your vehicle or for every two vehicles, depending on how you operate. And so that's something that will develop as the vehicle park increases. It'll probably be, you know, through our dealerships who are doing a great job of kind of preparing themselves for the industry, but it'll also be through our customers who are operating, as I said, in locally domiciled routes. And then I think there will be a more general development of the charging infrastructure as it goes along. And, again, one way to think about charging stations is they're kind of going to be – $150,000 or a couple hundred thousand dollars to put in a charging infrastructure station for yourself. So that is going to be something where people are having to spend money on. And Packer Parts is selling them now, and our financial companies are offering support of that. So kind of have created an entire model to support our customers as we move into that new opportunity.

That's helpful. And then can you just provide color on the engine parts mix versus, you know, other parts in the business in the quarter? And, you know, how close are we to, you know, seeing that in the selection point where your engine sold, you know, several years ago actually can start consuming more parts? And, you know, how do you think about that from like a gross margin mix perspective as we, you know, look towards the next year?

You know, I think that there continues to be We started the engine in the North American market in 2010, so people have gone through, obviously, a build cycle of it. We've got repeat customers that are seeing, you know, over the span, growth in the engine business, and it provides great parts return.

And it's fair to say that the engine parts business has grown faster than our average parts business, so we do get benefits from that going forward, too.

Thanks. I'll pass it on.

Our next question comes from the line of Seth Weber with RBC Capital Markets. Your line is now open.

Hi, guys. Good morning. Thanks for taking the question. Nice to see the parts revenue turn positive here in the quarter. I was wondering if you could just give any color on the cadence there. I think you had previously said June was running, I think, down mid-single digits. Is the right way to think about it that September was up kind of mid to high singles. Is that a fair way to think about the ramp?

Yeah, that's correct. September was on a per day basis was up 4% compared to last year. So we've seen continued positive momentum through the quarter.

Okay, thanks. And then just going back to the Finco business, It sounds like you kind of cleared the decks here a little bit with some inventory. So should we expect to start to see margin be up going forward? And do you think that that can get back into that sort of 20% margin business next year?

It was really good to see the used truck inventory come down and selling a lot of used trucks. A lot of the used truck performance will depend on what the used truck market does in general. and pack our trucks, get a nice premium, but we're also dependent on what our competitors are doing in that same marketplace.

Okay. If I could maybe just tuck in one last one. On the higher CapEx going forward, does any of that to include investments in any of your suppliers, or can you just talk about the health of the supply chain?

Sure, I'll happily take that one on and say that our supply chain has done a really good job as we've managed through the last couple of quarters, very dynamic. They've done a good job of pulling, as we're watching the build rates go up across the world, they're supporting that very well. They're focused on health and safety for their employees too. And the supply base is in good shape. And so that continues to be one of our great partnerships is working with them and making sure they're ready as we go. As far as investments, we don't have anything specifically earmarked or called out in terms of investments and suppliers.

Okay, guys, I appreciate it. Thank you.

You bet. Have a great day.

You too.

Our next question comes from the line of Matt Alcott with Cowan. Your line is now open.

Good morning and good afternoon. If I may ask a question on the class eight build cycle, I think after the initial COVID shutdowns, we saw a number of dynamics emerge, you know, lower fuel prices, lower interest rates, and maybe truck insurance premiums not as bad as they had been feared given the, you know, lower claims for insurance companies. Are we effectively basically pulling forward the cyclical expansion in Class VIII orders in North America and we could see somewhat of a moderation once, you know, we regain some sort of a post COVID normalcy.

I think, you know, we just came off of the third quarter, which was, you know, a good quarter, but we think that there's a lot of room for the markets to continue to just gradually strengthen, depending on what happens in the general economy. related to insurance and stuff, what I would share from our standpoint in play in that is we make sure that our trucks are able to be equipped with the latest in safety technologies to support low rates, to make sure that our customers have vision systems and lane departure and those kinds of features that help our customers keep their drivers and the general public safe. That's where our focus is there. But I think it's a little early after just a month or two of goodness to start thinking about it being towards the top.

Yeah, that's a fair point. And just one last quick question. Do you guys have any manufacturing facilities anywhere around the world that are currently at a higher risk of operational disruptions related to the ebbs and flows of shutdowns and reshutdowns and COVID transmission?

Hey, Matt, that's a good question. We spend a lot of time as a company making sure that health and safety is the number one, two, and three priority for us. And all of our factories compare best practices, and all of them are operating in a safe, healthy way. And so I don't see any greater risk in one place or the other because of the great job the operations teams have done around the world.

Great. Thanks, Preston. Appreciate it.

Have a great day. Our next question comes from the line of Rob Wertheimer with Mellius Research. Your line is now open.

Thank you. Good morning, everybody. Good morning, afternoon. So my question is just on the vocational segment. We've seen obviously COVID has done uncertain things to municipal budgets around the country. And then, you know, construction equipment's been a little bit weak. I don't know if you have an opinion on whether municipalities or related customers are more cautious in their purchasing or whether that recovery is proceeding along with everything else in trucks and maybe a similar question for dump and other similar related markets to construction. Thanks.

Sure thing. What we've seen is we're the leader in those segments with our great Peterbilt and Kenworth products and DOF products. They do a great job of our customers and I would say that the vocational market seems to be doing quite well. It's one of the places where people are spending money on their homes. They're putting in decks, doing whatever they're doing, and so there's a lot of shipment of goods for home improvement. There's a lot of construction still continuing. Housing starts are strong, and so I think the sector is really doing pretty well. There's oil and gas is down, but in general, the total sector is doing really well.

Okay, that answers it. Thank you.

Our next question comes from the line of Joe O'Day with Vertical Research. Your line is now open.

Hi, everyone. First question, it's good to hear that pricing has been pretty stable through the disruption this year. I'm interested in how you're thinking about the pricing opportunity next year as those build slots start to open up in the order book, whether or not at a below replacement demand type of outlook. you see an opportunity to get price or if you think it's going to be more of a flattish kind of environment?

Well, I think people's pricing expectations are always that we would like to see our trucks continue to provide great service. And as our trucks provide great service and low operating costs, they create a pricing premium for the Packard products. And that's kind of the way we think about it relative to this quarter. We'll see how the market develops as we look forward.

And then on the fuel cell side of things, with Toyota selecting Hino for a Class 8 hydrogen fuel cell truck in North America, does that have any impact on what you've been doing on the hydrogen fuel cell work in collaboration with them?

No, it doesn't at all, right? I mean, Toyota's a great partner for us in developing these hydrogen fuel cell products, and it's not an exclusive thing, and it'll need, you know, the hydrogen fuel cell market will need a lot of players and a lot of volume to make it commercially viable. So it's accretive to our business model with them.

Got it, thanks very much.

You bet. Our next question comes from the line of Adam Allman with Cleveland Research. Your line is now open.

Hey guys, good morning, good afternoon. I wanted to go back to, I think at the beginning of the prepared remarks you had talked about the order rates that you were seeing in North America. Could you tell us what the order intake in Europe was for the third quarter relative to last year?

Order orders in Europe were up 6% compared to the third quarter of last year.

Okay, great. That's helpful. Thanks. And then I guess more broadly on, you know, we talked earlier about some of the key, you know, R&D span going up into next year. I was wondering if you could, you know, spend some time talking about some key programs that would be new and different that are of meaningful size that are getting folded into the budget. And I assume some of the spend next year is also catch up from this year. If you could maybe dimension that a little more because it is a relatively big increase relative to this year. I'm just trying to get at what that normalized rate would be over the medium term.

Well, we have some really exciting, happy to do so, we have some really exciting truck programs that are ongoing right now that will develop further next year, and we'll be looking forward to sharing those with you when its time is right. We have engine development programs going on with our high-performing diesel engine programs around the world, and then you add to that the autonomy, connectivity, and electrification efforts that our teams are working on, and those are kind of the bulk of the work that we have outlined for next year and the coming years.

Okay, thanks.

Our next question comes from the line of Rob Salmon with Wolf Research. Your line is now open.

Hey, good morning and good afternoon. A few kind of follow up questions related to the fourth quarter gross margin outlook. Are you guys baking in kind of a similar aftermarket sales growth rate as you were seeing in September for the fourth quarter? or is something different kind of baked in related to your outlook?

The 12% to 13% gross margin, and like Preston said, we're achieving the best margins in the industry, and we expect to be in that range despite a mix of more truck or at least more truck growth than parts growth. I think you should think of parts as being the same or a little bit up compared to last year in the fourth quarter.

That's helpful. And then the comments that you guys had mentioned about sequential growth in deliveries, it sounded to me like it was more of a comment related to deliveries per day. Would the comment about sequential growth on an absolute level relative to third quarter deliveries in U.S.-Canada apply, or is it too early to tell on that front?

The comment on 10% higher truck deliveries wasn't on the total number, not on a per day number.

It was the comment you had made that you would see growth across all segments. Is what I was alluding to in the prepared marks, perhaps I misheard that comment, but was just curious if, go ahead.

We're taking build rates up in all our markets. So the increased build rates applies to all our factories. But we do have fewer working days in North America in the fourth quarter compared to the third quarter and more in Europe. which is the case every year.

Okay. And then the final question I had is related to the charging infrastructure. When you think about historical returns in your financial services segment, how should we think about kind of charging infrastructure returns on the investment that you would expect to achieve relative to the broader financial services segment?

Yeah, I would say you could expect at this point to think of them in a similar fashion.

Sounds good. Appreciate the time, guys.

You bet. Have a great day.

Our next question comes from the line of Courtney Yacobonas with Morgan Stanley. Your line is now open.

Hi. Good afternoon, guys. Thanks for the question. Good afternoon, Courtney. Maybe just following up on that question, could you just share with us how to think about the sequential increase of in deliveries between U.S. and Canada versus Europe for the fourth quarter?

Well, one way to think of it is that, you know, Harry outlined it really well, is to think about the build days. What I would rather say is, you know, there's build rates, daily build rates are going up in all markets in fairly, you know, good manners, and we think that that could continue. And so that's the easiest way to think about it without getting conflicted about the number of build days in the quarter. So build rates are up. Markets are improving, trucks are doing really well, and we think we've got a good look at the future coming towards us.

Okay, gotcha. And then maybe just on the parts growth, I think you had commented thinking that it'll probably be slightly up in the fourth quarter. I think you had previously talked about a lot of deferred maintenance that was happening at this point, do you feel like that's largely caught up and there's not much more deferred maintenance? And then if you can also just give us a sense of the e-commerce platform. I think you had said it was up 20% in the first half of the year. Are you still seeing those levels in the third quarter and into the fourth?

I think the way to think about the parts business right now is that there is strong truckload business around the country, truckload, occasional. All those markets are doing well. When trucks are running, they consume parts. So that's what's happening mostly. So that's one of the reasons the parts business is doing good. And the other is, as we mentioned, we've got great distribution capabilities, which means we're getting an increasing share of the market, the parts business. The team's doing a fantastic job, not just with proprietary parts, but with Allmake parts as well, their TRP brands around the world. So that's contributing to the growth. And then the e-commerce programs that we have put in place or they put in place are just fantastic also, right? They help make it easier to buy parts through PACCAR. And That's what the team is always focused on is making our customers' lives easier and doing a great job in providing that transportation solution for them. They're really nailing it.

Gotcha. That's helpful. And then just lastly, just to follow up to the comments about the Toyota Hino partnership, can you just help us kind of understand when we're thinking about hydrogen fuel cell trucks, how much of it is the design of the truck versus, you know, the fuel cell provider that really is going to dictate the difference in performance, you know, just based on, you know, the different prototypes that you have out there? And are you guys also considering, you know, other fuel cell providers in addition to Toyota?

Sure. I would think about it as the fuel cell is a critical part of the business. The truck is a critical part of the business. The integration of the two is a critical part of the business. supporting them in the field is a critical part of the business, the distribution, all that matters. And so we're paying attention to all elements of that. And I guess to your other questions, yeah, we are always looking for the great partners to work with. Toyota is a great partner. We're working with partners on battery electric, and we're always looking for the right people to be partnered with to make sure our customers get the premium trucks we provide.

Gotcha. Thanks.

All right. Have a great day.

There are no other questions in the queue at this time. Are there any additional remarks from the company?

We'd like to thank everyone for joining the call and thank you, operator.

Ladies and gentlemen, this concludes PACR's earnings call. Thank you for participating. You may now disconnect.